Taiwan Dollar: Strong fundamentals but near-term pressure – Commerzbank

Commerzbank underscores Taiwan’s exceptionally strong AI-driven Gross Domestic Product (GDP) growth and rising inflation, which bolster the case for a December CBC rate hike. These factors are supportive for TWD, yet large foreign portfolio outflows have kept USD/TWD near this year’s highs around 32.60. The bank expects a supportive tone for the pair in the near term.

AI-led growth and CBC tightening risks

"Taiwan's Q3 GDP expanded by a stronger-than-expected 14.4% yoy (Bloomberg consensus: 12.0%), from 12.9% in Q2. This marked the fourth consecutive quarter of double-digit growth, the longest such expansion since 1986-87. On a seasonally adjusted basis, GDP growth accelerated to 3.2% qoq from 1.4% in Q2."

"The stronger-than-expected GDP expansion, alongside higher inflation, strengthens the case for monetary tightening by CBC at its 17 December meeting. CBC has maintained its benchmark discount rate at 2.00% for ten consecutive meetings, but its September meeting minutes revealed that two board members favoured raising rates."

"September headline inflation picked up to 2.7% yoy, while core inflation rose to 2.5%, suggesting that underlying price pressures warrant closer attention, although temporary food and seasonal factors contributed to the increase. A modest 12.5bp rate hike in December is increasingly plausible, although the CBC could still prefer to wait for clearer evidence of sustained inflationary pressures."

"Strong growth, Taiwan's substantial external surplus and increased expectations of CBC tightening are supportive of TWD. However, these positive fundamentals have been offset by substantial foreign portfolio outflows, which the CBC estimated at USD54.3bn from July to 21 October."

"Consequently, TWD could remain under near-term pressure despite strong economic fundamentals. The USD, oil prices, and net foreign equity flows will remain the key drivers for TWD. For USD/TWD, it is holding at the high for this year, around 32.60 and we look for a supportive tone in the near term."